A NALYSIS OF THE F ISCAL Y EAR
2008 I LLINOIS G ENERAL F UND
B UDGET P ROPOSAL
By:
Chrissy Mancini
Director of Budget and Policy Analysis
MAY 2007
CENTER FOR TAX AND BUDGET ACCOUNTABILITY
Center for Tax and Budget Accountability
A B OU T CTBA
Founded in 2000, the Center for Tax and Budget Accountability is a non-profit, bi-partisan research and advocacy think tank committed to ensuring that tax, spending and economic policies are fair and just, and promote
opportunities for everyone, regardless of economic or social status.
CTBA uses a data-focused, bipartisan approach to work in partnership with legislators, community groups and
other organizations to help change both public policy and perceptions.
FOR MORE INFORMATION CONTACT:
CHRISSY MANCINI
DIRECTOR OF BUDGET AND POLICY ANALYSIS
CMANCINI@CTBAONLINE.ORG
C E N T E R F O R T A X A N D B UD G E T A C C O UN T A BI L I TY
70 E. L A K E S T , S UI T E 1700
C HI CA GO , IL 60601
P H O N E : (3 12) 322-1041
F A X : (312) 578-9258
W W W . C T BA O N L I N E . O R G
© 2007, Center for Tax and Budget Accountability
2
Center for Tax and Budget Accountability
Analysis of the Fiscal Year 2008
General Fund Budget Proposal
T ABLE OF C ONTENTS
1. Executive Summary……………………………………………………...4
2 FY 2008 General Fund Budget Highlights…………………………….5
3. Spending…………………………………………………………………...6
4. New Spending Initiatives………………………………………………..8
5. Education…………………………………………………………………8
6. Health Care……………………………………………………………….9
7. Revenues………………………………………………………………….10
8. Debt and One-Time Revenues……………………………………….11
Short Term Borrowing……………………………………………….12
9. New Revenue Initiatives……………………………………………….13
Why the GRT is Not the Answer……………………………………13
10. The FY 2008 Pension Proposal………………………………………...15
Lease of the Illinois Lottery…………………………………………..16
The Pension Obligation Bond Option……………………………..17
New Pension Payment Schedule Proposal – Concern………..17
11. Conclusion………………………………………………………………..18
12. Endnotes…………………………………………………………………..19
Center for Tax and Budget Accountability
3
Analysis of the Fiscal Year 2008 Illinois Budget Proposal
E XECUTIVE S UMMARY
Analysis of the Fiscal
Following is an analysis of the proposed Fiscal Year (FY) 2008 General Fund Operating Budget. The
General Fund budget includes projected spending on public services appropriated under the General
Revenue Fund (GRF) like education, health care and human services, as well as the state’s special purpose funds, like the Illinois Wildlife Preservation Fund. As such, the General Fund budget provides a
more complete basis for analyzing state revenue and spending trends than the GRF alone.
The General Fund budget proposed for FY 2008 demonstrates the continuation of
two significant flaws in the state’s overall fiscal system. First, revenue growth will
again fail to keep pace with the economy, falling short of inflation. This pattern of
revenue underperformance is long standing,¹ and has contributed substantially to
Illinois’ structural deficit.² A “structural deficit” is the term used to describe an ongoing shortfall between the revenues that a tax system generates and the inflationary cost of continuing the same level of public services from one year to the
next, without expanding or adding programs.
If the FY 2008
budget passes as
proposed, almost
7% of spending on
current public services will be paid
for with debt
rather than recurring revenue.
The state’s historic revenue underperformance also has contributed to the second
significant flaw demonstrated in the FY 2008 General Fund budget proposal – an over reliance on debt
to fund current services. If the FY 2008 budget passes as proposed, almost 7% of spending on current
public services will be paid for with debt rather than recurring revenue. Generally speaking, current
public services should be paid for with recurring revenue. Debt should be reserved for covering capital
projects that have long-term useful lives, much like a family incurring a mortgage to finance the purchase of a home.
For FY 2008, the state is proposing the passage of a new tax on business called the Gross Receipts Tax
or "GRT". A GRT is a tax imposed on all income received by a business without any deductions for costs
of doing business, such as wages. GRTs are not based on a company’s profit or loss for a given tax
year; rather, they are imposed on gross income.
The proposed GRT would impose a tax rate of 1.0% on the gross receipts from the sale of all manufacturing goods, and 2.0% on the gross receipts from the sale of all service industry items. According to
the Office of Management and Budget ("OMB"), the GRT would raise an estimated $2.626 billion in FY
2008, and around $6 billion annually thereafter.³ Additionally, the Governor has proposed a 3.0%
payroll tax that employers would pay on Illinois employee wages. This payroll tax would be reduced
by a credit based upon an employer’s contribution to cover health insurance cost for its employees.4 This
proposed healthcare/payroll tax is expected to generate $1.1 billion.5
4
Center for Tax and Budget Accountability
www.ctbaonline.org
FY 2008
G ENERAL F UND B UDGET H IGHLIGHTS
•
Overall spending on public services is scheduled to increase in nominal terms by $3.2 billion, or 11.3%,
from FY 2007 General Fund expenditures. After adjusting for inflation, real spending under the proposed
FY 2008 budget will increase by 8.1%, or $2.3 billion.6
•
Current revenue growth, however, is projected to increase by only $805 million. This is not sufficient to
cover the cost of continuing the public services Illinois provided in FY 2007, adjusting solely for inflation. 7
The inflation-adjusted cost of just maintaining FY 2007 service levels in FY 2008 is $907 million. Therefore,
projected revenues fall short of projected cost increases for existing programs by at least $102 million,
based on the CPI. The shortfall is even greater, increasing to $357 million, when inflationary service costs
are adjusted by the more appropriate Employment Cost Index or ECI.
•
In addition to the projected cost of maintaining current services, the FY
2007 budget proposal includes at least $2 billion of spending on new
initiatives. These initiatives primarily include items an increase of $1.5
billion in K-12 education funding, and the Governor's Illinois Covered
Health Insurance Plan initiative.
•
•
Projected revenues fall short of
projected cost increases for existing programs by at least $102
million, based on the CPI. The
shortfall is even greater, increasing to $357 million, when inflationary service costs are adjusted
To cover the cost of these new initiatives, the FY 2008 budget proposal by the more appropriate Employincludes various revenue enhancement proposals, which OMB estimates ment Cost Index or ECI.
will generate $2.186 billion. These initiatives include items such as a
change in business taxes from the current Corporate Income Tax to a
Gross Receipts Tax, a payroll tax on wages, and additional gaming taxes.
To the extent any of the Governor's proposed revenue initiatives do not pass the legislature, there will be
revenue shortfalls that necessitate either passage of other revenue initiatives like HB/SB750 {for a summary
of that legislation see the CTBA fact sheets available online at www.ctbaonline.org}, incurring more debt or
cutting existing or newly proposed programs.
FISCAL NOTE: WHY ADJUST FOR INFLATION?
The answer is simple. It's the only way to determine whether spending on public services and/or revenue growth
is increasing in real terms, is just keeping pace with cost increases generated by the economy over time, or is
falling behind cost increases generated by the economy. The most common inflation metric is the "Consumer
Price Index" or "CPI". The CPI is the rate of inflation based on the change in the cost of all goods and services
that collectively constitute the U.S. consumer economy. However, public services, whether education, police protection, healthcare or human service related, are labor intensive endeavors, with labor costs generally comprising over 80% of total cost. Hence the CPI is not the best inflationary metric to use for determining the increased
costs of public services annually. The preferred inflation metric is the "Employment Cost Index" or "ECI", which is
tied directly to changes in labor market costs.
Center for Tax and Budget Accountability
5
Analysis of the Fiscal Year 2008 Illinois Budget Proposal
S PENDING
Figure 1 illustrates proposed FY2008 General Fund spending by major purpose. In total, health care, education and human services make up over 84 percent of the General Fund budget.
Figure 1
FY 2008 Recommended Appropriations
as a Percentage of Total
Agrilculture
0.15%
Adm inistration
4.04%
Pensions
3.25%
Other
3.95%
Natural Resources 0.31%
Pre K-12 Education
28.27%
Environm ental
Protection Agency
0.0032%
Higher Education 7.73%
Corrections
4.22%
Hum an Services
14.71%
Health Care
30.23%
Children and Fam ily
Services
3.14%
- ISBE and Higher Ed does not include pension cont ribut ions
- Pension cont ribut ions include FY 2008 GRF appropr iat ed
- Healt h Care includes Public Healt h and Healt h Care and Family Ser vices
- Administ r at ion includes all boar ds, commissions, agencies, aut hor it ies, dist r ict s, counc
Revenue, CMS, Inspect or Gener al and all legislat ive, const it ut ional and judical of f ices
Source: Illinois FY 2008 Proposed Budget
Figure 2 shows: (i) the FY 2007 enacted General Fund budget8 {Note, the state frequently spends a different amount than
what is authorized by the budget. Since FY2007 is not yet complete, the budgeted appropriations are currently the best
dates available in spending.}; (ii) the inflationary cost of just maintaining FY 2007 services levels in FY 2008, using the CPI
and ECI; (iii) the proposed FY 2008 budget; and (iv) the difference between the budget as proposed and the inflationary
cost of maintaining FY 2007 services in FY 2008.
Figure 2:
General Fund Spending: Proposed FY 2008 Compared to FY 2007 Inflation Adjusted (CPI) ($ in millions)
General Fund FY 2007
Inflation Adjusted to
General Fund
FY 2008 (CPI)
FY 2007
$28,350
$29,257
Source: Illinois FY 2008 Proposed Budget
General
Fund
FY 2008
$31,562
Difference
$2,305
% Change
8.13%
Figure 3 shows the same categories as Figure 2, except the inflation adjustment is based on the more accurate ECI.
Figure 3:
General Fund Spending: Proposed FY 2008 Compared to FY 2007 Inflation Adjusted (ECI) ($ in millions)
General Fund FY 2007
Inflation Adjusted to
General Fund
FY 2008 (ECI)
FY 2007
$28,350
$29,512
Source: Illinois FY 2008 Proposed Budget
6
Center for Tax and Budget Accountability
General
Fund
FY 2008
$31,562
Difference
$2,050
% Change
7.23%
www.ctbaonline.org
Figure 4 compares the estimated GRF FY 2007 spending levels to the proposed FY 2008 proposed spending levels by
government department. It also includes the inflation-adjusted cost (CPI based) of maintaining FY 2007 services in FY
2008. After adjusting for CPI, the Illinois State Board of Education is scheduled to receive a real increase of $1,315 billion. The Departments of Human Services and Corrections are also scheduled to receive increases. Again, after adjusting
for CPI, Higher Education, Environmental Protection and Agriculture are scheduled to be cut in FY 2008.
Figure 4:
Comparison of GRF Spending by Department Inflation Adjusted(CPI): FY 2007 & FY 2008
Agency
General Revenue Fund Total
Illinois State Board of Education
Higher Education
Human Services
Children and Family Services
Health Care
Corrections
Natural Resources
Agriculture
Environmental Protect Agency
Source: Illinois FY 2008 Proposed Budget
FY 2007
Estimated
$25,675,837
$6,504,371
$2,151,873
$3,985,204
$775,892
$7,884,006
$1,125,218
$84,544
$48,779
$1,229
2007
Inflation
Adjusted
CPI
$26,497,464
$6,712,511
$2,220,733
$4,112,731
$800,721
$8,136,294
$1,161,225
$87,249
$50,340
$1,268
FY 2008
Recommended
$28,394,988
$8,027,695
$2,194,761
$4,175,878
$890,442
$8,584,696
$1,197,026
$88,997
$42,481
$906
Diff FY 2007 CPI Inflation
Adjusted and FY 2008
Recommended
$1,897,524
$1,315,184
-$25,972
$63,147
$89,721
$448,402
$35,801
$1,748
-$7,859
-$362
Figure 5 compares GRF FY2007 spending levels to FY2008 proposed spending levels by government department, this
time adjusting for inflation based on the more accurate ECI.
Figure 5:
Comparison of GRF Spending by Department Inflation Adjusted (ECI): FY 2007 & FY 2008
Agency
General Revenue Fund Total
Illinois State Board of Education
Higher Education
Human Services
Children and Family Services
Health Care
Corrections
Natural Resources
Agriculture
Environmental Protection
Agency
Source: Illinois FY 2008 Proposed Budget
FY 2007
Estimated
$25,675,837
$6,504,371
$2,151,873
$3,985,204
$775,892
$7,884,006
$1,125,218
$84,544
$48,779
2007 Inflation
Adjusted ECI
$26,728,546
$6,771,050
$2,240,100
$4,148,597
$807,704
$8,207,250
$1,171,352
$88,010
$50,779
FY 2008 Recommended
$28,394,988
$8,027,695
$2,194,761
$4,175,878
$890,442
$8,584,696
$1,197,026
$88,997
$42,481
Diff FY 2007 ECI Inflation Adjusted and FY
2008 Recommended
$1,666,442
$1,256,645
-$45,339
$27,281
$82,738
$377,446
$25,674
$987
-$8,298
$1,229
$1,279
$906
-$373
Center for Tax and Budget Accountability
7
Analysis of the Fiscal Year 2008 Illinois Budget Proposal
N EW S PENDING I NITIATIVES
The FY 2008 budget proposal outlines numerous new spending initiatives including: (i) $1.5 billion for PreK-12 Education;
and (ii) $374 million for the Illinois Covered health insurance program. Figure 6 outlines the proposed new initiatives.
Figure 6:
New Spending Initiatives for FY 2008 ($ in millions)
New Program Proposals
Increase P-12 Education Funding
Illinois Covered-Health Insurance
Increased Medical Provider Rates
Capital
Healthcare System Improvement
Total Sources
$1,500
$374
$90
$12
$16
$1,992
Source: Illinois Commission on Government Forecasting and Accountability, FY 2008 Revenue Forecast and Updated FY 2007 Revenue Estimate, March 2007.
E DUCATION
For FY 2008, the state proposes increasing PreK-12 education by almost $1.5 billion over FY 2007 in nominal dollars, or
$1.3 billion after adjusting for inflation. This increase however, is dependent on the passage of the proposed GRT. To
the extent that the GRT does not pass the General Assembly, it is uncertain how much of the proposed increases for education will become law.
Major Proposed Education Funding Increases for FY 2008 include:
•
•
•
•
•
An increase in the K-12 Foundation Level OF $686, to $6,020 per pupil.
• The Foundation Level does not represent total school expenditures per child. It in fact does not include
many basic costs, like transportation and special education. Instead, the Foundation Level is just the minimum amount that all school districts are supposed to have to spend per pupil, through a combination of
state and local property tax revenue, to cover the cost of core academic programs.
• The current Foundation Level is not based on any objective, measurable standard. It simply represents
what the state believes it can afford. The nonpartisan Education Funding Advisory Board or "EFAB", has
created a recommended FY 2008 foundation level of $6,974 that ties the per pupil expense to the actual cost of an academic curriculum of sufficient quality to permit an efficiently operated school district to
obtain the result of having two-thirds of its non-at-risk children pass the Illinois standardized tests.9
• The proposed Foundation Level increase is still $954 short of the FY 2008 Education Funding Advisory
Board recommendation of $6,974.
An increase in the reimbursement rate for certified Special Education Teachers from $8,000 per teacher (initially
set in 1985) to $10,750 per teacher.
• On an inflation-adjusted basis, however, the personnel reimbursement rate for these items would increase
to $18,714 for a certified special educator.10
An additional $69 million for Pre-School for All.
$10 million for one year grants to schools to help fund Full-Day Kindergarten.
Fully funding the state’s share of mandated categoricals such as transportation and orphanage education.
For more on EFAB and school funding, see the CTBA issue brief, The Illinois School Funding
Formula and the Distribution of General State Aid,
available online at:
http://www.ctbaonline.org/Education.htm
8
Center for Tax and Budget Accountability
www.ctbaonline.org
H EALTH C ARE
For FY 2008, the Governor is proposing expanding two current state sponsored health care programs that provide health
care access for low income children and families―"All Kids" and "Family Care"―to include all the uninsured in Illinois under the newly proposed Illinois Covered plan. Under this proposal, Illinois would enter into a public-private partnership
with private insurance carriers to provide insurance to (i) individuals whose employers do not offer coverage and (ii) employees of by small businesses.
The plan would be phased in over the next few years at a total cost estimated by OMB to be between $2.0 and $2.5
billion funded through revenue from the Gross Receipts Tax and the Payroll Tax. In FY 2008, the first phase of the plan,
$374 million is proposed to be spent.11
Figure 7 illustrates the difference between current law and the proposed Illinois Covered Plan. To the extent that the
Gross Receipts Tax does not pass the General Assembly, it is uncertain how much of the proposed health care expansion
will become law.
Figure 7:
Illinois Covered Proposal Compared to Current State Health Care Program
Note: For 2007, the Federal Poverty Level for individuals is $10,210 and for an adult with two children is $17,170.
Program
Currently
Proposed “Illinois Covered”
Individuals
None
Individuals whose employers do not provide group health insurance and
whose incomes are at or below 400% of the federal poverty level (for
the first year). Must work at lease 15 hours per week.
Childless Adults
Medicaid coverage only to
the aged, blind and disabled up to 100% of the
federal poverty level.
Persons between 19 and 64 who do not have access to employer provided insurance and are at or below 100% of the federal poverty level
would be eligible.
FamilyCare – Parents
living with children 18
years old or younger
Healthcare coverage to
parents living with their
children 18 years or older
up to 185% of the federal
poverty level.
Expands to parents and caretaker relatives who have incomes at or
below 400% of the federal poverty level.
• For a family of 3, 400% of the federal poverty level is
$68,680.
Blind and Disabled
Currently, seniors, disabled
and the blind, up to 100%
of the federal poverty
level.
Provides health benefits for
workers with disabilities up
to 200% of the federal
poverty level.
Assistance for seniors, blind and disabled up to 300% of the federal
poverty level.
• For an individual, 300% of the federal poverty level is
$30,630.
Subject to federal approval, workers eligible for the Health Benefits
Workers with Disabilities program will be eligible for this new program
if their income is equal to or less than 350% of the federal poverty
level.
• For an individual, 350% of the federal poverty level is $35,735.
None
Illinois based businesses employing not more the 25 people may buy
into program. For the 1st year, at least 2/3 of employees must earn
less than 400% of the federal poverty level. Beginning in the 2nd year,
all employers may participate.
Workers with Disabilities
Small Businesses
Source: Presentation to the House Democratic Caucus, March 20, 2007
Center for Tax and Budget Accountability
9
Analysis of the Fiscal Year 2008 Illinois Budget Proposal
H EALTH C ARE -C ONTINUED
As the number of uninsured in Illinois increases, increasing access to health care is needed. That said, Illinois’ chronic fiscal
problems make it increasingly difficult for the state to keep up with soaring health care costs, which are growing three
times faster than general inflation, making health care funding one of the state’s greatest challenges.12 For instance, Illinois’ Medicaid program grew at an average annual rate of nine percent between fiscal years 2000 and 2004, while
state tax revenue grew at an average annual rate of only 2.5 percent over the same period.13 Skyrocketing Medicaid
costs only compound Illinois’ annual revenue shortfalls, resulting in cuts to other vital human services and the financing of a
greater portion of government operations with debt rather than tax revenue.
By
deferring
these
“Medicaid liabilities,” the
While many states have elected to cut Medicaid benefits or restrict eligibility as a way to curtail
state essentially pushes
program costs, Illinois should be applauded for not taking that approach, recognizing that procosts from one fiscal year
viding basic health care to low-income, uninsured families is an essential public service. Rather,
to the next, making the
the state has dealt with the predicament another way: by delaying payment of Medicaid bills
state budget appear balowed to health care professionals, in many cases for months. By deferring these “Medicaid lianced each year when in
abilities,” the state essentially pushes costs from one fiscal year to the next, making the state
fact it is not.
budget appear balanced each year when in fact it is not. This results in long payment delays to
hospitals, doctors and pharmacists that treat the most vulnerable in our society.
The state’s unpaid Medicaid liabilities nearly tripled between fiscal year 2000 and 2005, increasing from $977 million in
2000, to $2.7 billion in 2005.14 Currently, the past due payments are approximately $2 billion.15
R EVENUES
As Figure 8 shows, the Governor’s Office of Management and Budget (GOMB) estimates the state will realize $900 million in revenue growth from state and federal sources in FY 2008. The Illinois Commission on Government Forecasting and
Accountability estimates revenue growth at $805 million
Figure 8:
GOMB and COGFA Estimated Revenue Growth ($ in millions)
Estimated Revenue Growth
From Existing Sources
Federal
Total Growth
GOMB
$614
$286
$900
COGFA
$519
$286
$805
Source: Illinois FY 2008 Proposed Budget and Illinois Commission on Government Forecasting and Accountability, FY 2008 Revenue Forecast
and Updated FY 2007 Revenue Estimate, March 2007
GOMB also estimates $2.186 billion of projected revenue the state will receive if the new initiatives outlined in Figure 9
below become law. These new initiatives combined with GOMB’s forecasted FY 2008 revenue projections total $3,086
billion in projected new revenue for FY 2008.
Figure 7:
GOMB New Revenue Initiatives (Must be passed by the legislature)
New Revenue Proposals
Gross Receipts Tax Plan
Enhanced Federal Matching Revenue
ITP
Riverboat tax and fee changes
Proposed Increase to Base Revenue
Offset of Lottery Revenue
Total Growth from Proposed Changes
$ in millions
$2,626
$63
$32
$115
$2,836
-$650
$2,186
Source: Illinois Commission on Government Forecasting and Accountability, FY 2008 Revenue Forecast and Updated FY 2007 Revenue Estimate, March 2007.
10
Center for Tax and Budget Accountability
www.ctbaonline.org
Figure 10 displays the difference in the current revenue forecasts by GOMB and Illinois Commission on Government Forecasting and Accountability. COGFA forecasts revenue (without the new revenue initiatives outlined above) will not grow
sufficiently in FY 2008 to keep pace with the CPI inflation adjusted increases in the costs of simply maintaining FY 2007.
The CPI inflation adjusted shortfall in revenues versus costs for FY 2008 projected by COGFA is $102 million. When adjusting for the more appropriate ECI, the revenue shortfall is worse, increasing to $357 million. GOMB’s forecast for FY
2008, however, is quite different, projecting that revenue growth will fall short of maintaining existing services levels by
$7 million.
Figure 10:
FY 2008 Revenue Estimate Comparison (CPI): GOMB & COGFA
$ in millions
Projected Increase From State Sources
without Gross Receipts Tax Plan
Projected Increase From Federal Sources
Total Increase
Amount Needed to Keep Pace with FY
2007 Inflationary Cost Increases (CPI)
Difference
GOMB
COGFA
$614
$286
$900
$519
$286
$805
$907
-$7
$907
-$102
Source: Illinois FY 2008 Proposed Budget and Illinois Commission on Government Forecasting and Accountability, FY 2008 Revenue Forecast and
Updated FY 2007 Revenue Estimate, March 2007.
Figure 10:
FY 2008 Revenue Estimate Comparison (ECI): GOMB & COGFA
$ in millions
Projected Increase From State Sources
without Gross Receipts Tax Plan
Projected Increase From Federal Sources
Total Increase
Amount Needed to Keep Pace with FY
2007 Inflationary Cost Increases (ECI)
Difference
GOMB
COGFA
$614
$286
$900
$519
$286
$805
$1,162
-$262
$1,162
-$357
Source: Illinois FY 2008 Proposed Budget and Illinois Commission on Government Forecasting and Accountability, FY 2008 Revenue Forecast and
Updated FY 2007 Revenue Estimate, March 2007.
D EBT
AND
O NE -T IME R EVENUES
Figure 11 shows Illinois will continue to rely on significant infusions of debt and one-time revenue sources to fund services
in FY 2008. For example, the Illinois Comptroller estimates the state will artificially balance its FY 2007 budget by deferring its obligation to pay $2.0 billion it owes to providers of Medicaid health care services in FY 2008.16 Borrowing
and utilization of other one-time revenue sources like fund sweeps to pay for current operations has become common
practice because the Illinois revenue system cannot cover current public service costs.17
Figure 11:
FY 2008 Budget Spending Covered by Debt & One-Time Revenues
($ in millions)
Deferred Medicaid Bills
Fund Sweeps
Charge Backs
Total
$2,000
$117
$76
$2,193
Source: Illinois Office of the Comptroller, 3/21/2007 and Illinois Commission on Government Forecasting and Accountability
Center for Tax and Budget Accountability
11
Analysis of the Fiscal Year 2008 Illinois Budget Proposal
D EBT
AND
O NE -T IME R EVENUES -C ON ’ T
In fact, as Figure 12 shows, Illinois’ flawed revenue system has forced state government to use almost $13 billion in a combination of debt and non-recurring, one-time revenues since FY 2003 to maintain current spending on public services.
Figure 12: Debt and One-Time Revenues FY 2003 – FY 2008
FY
2003
$ in millions
Revenue Adjustments
Fund Sweeps
Chargebacks
Executive Order 10
Increased Fee Transfers
Tax Amnesty
Pension Bond Sale
Cigarette Tax Adjustment
Federal Fiscal Relief
Sale of State Assets
Sub Total
$165.0
$300.0
FY 2004
$158.5
$269.4
$5.5
$88.8
$290.0
$1,395.0
FY 2005
FY 2006
FY 2007
$259.8
$208.2
$129.0
$140.3
$200
$37.6
$100.0
$35.3
FY 2008
$117.0
$76.0
$50.0
$465.0
Appropriation Adjustments
Accelerated/Deferred Medical Payments
Restructure of ERI Pension Payment
Increase in State Pension Fund Approps
Increase in non-IDOT Road Fund Approps
Decrease in State Pension Fund
Sub Total
Grand Total
$750.0
$233.0
$3,190.2
$655.6
$304.6
$1,100.0
$200.0
$200
$2,900
$2,000.0
$1,133
$4,033
$4,233.0
$2,193.0
$80.0
$95.0
$145.0
$145.0
$95.0
$560.0
$145.0
$3,335.2
$1,525.0
$2,180.6
$1,178
$1,178
$1,482.6
Short Term Borrowing
Short-term borrowing is sometimes appropriate to help with cash flow or to weather one-time revenue shortfalls caused
by a recession or unique event (like significant flood damage). Borrowing to pay for public services is problematic, however, if used to cover ongoing revenue shortfalls caused by structural inadequacies in a fiscal system. In such cases, natural revenue growth will never catch-up with both the cost of repaying the debt, plus interest, and the inflationary cost of
maintaining public services over time. This is exactly what is happening in Illinois. Over the past six years, the state has
short term borrowed over $6 billion, mostly to pay Medicaid bills. Prior to FY 2002, the state had not practiced short
term borrowing in over five years, since it borrowed $500 million in FY 1996.18
Figure 13: Short Term Borrowing FY 2002 – FY 2007
Fiscal Year
Short Term Borrowing
FY 2007
FY 2006
FY 2005
FY 2004
$ Amount
in Millions
$900
$1,000
$765
$850
FY 2003
$1,500
FY 2002
Total
$1,000
$6.015
Reason
Medicaid Bills
Medicaid Bills
Medicaid Bills
Medicaid Bills
Medicaid Bills, K-12 State Aid Payments, Income Tax
Refunds, Long Term Care Payments
Medicaid Bills, Income Tax Refunds, Long Term Care
Payments
Source: Illinois Commission on Government Forecasting and Accountability Bonded Indebtedness Reports
12
Center for Tax and Budget Accountability
www.ctbaonline.org
N EW R EVENUE I NITIATIVES —
P ROPOSED G ROSS R ECEIPTS T AX
For FY 2008, the Governor is proposing a new tax on business called the Gross Receipts Tax or GRT. A GRT is a tax imposed on all income received by a business without any deductions for costs of doing business, such as wages. GRTs are not
based on a company’s profit or loss for a given tax year like the current Illinois Corporate Income Tax. Rather, GRTs are
imposed on all income, regardless of profitability. This makes the GRT a stable revenue source because all firms, even
unprofitable ones, pay tax, which results in revenue for the state.
The proposed Illinois GRT rate is 1.0% on all receipts from manufacturing sales and 2.0% on all receipts from the sale of
services. Business with receipts under $2 million would be exempt from the GRT. The OMB estimates the GRT will raise
$2.626 billion in FY 2008, and $6 billion annually thereafter.19 Additionally, the Governor has proposed a 3.0% payroll
tax that all employers with ten or more workers would pay on Illinois employee wages. This payroll tax would be reduced
by a credit based upon the employer’s contribution to cover health insurance cost for its employees. OMB estimates this
payroll tax will generate $1.1 billion annually.
On Wednesday, May 9, 2004, the Illinois House of Representatives held a hearing on the Governor's Gross Receipts Tax
(GRT) proposal. During the House hearing, opponents and supporters for the Governor's GRT proposal made their
cases. At the end of the day, House members voted on Resolution 402 to support or oppose the Governor's proposal.
Diverse interest
groups are speaking
in a common
While last Thursday's vote sent a clear message that Illinois Representatives are not in favor of
voice, agreeing on the
the Governor's gross receipts tax proposal as the best revenue solution for Illinois, it is significant need to increase
to note that legislators, business groups, elected officials, Ph.D. economists, and advocates around taxes so as to put the
Illinois recognize and are committed to addressing the state's dire need to raise new state reve- state's fiscal house
nue in order to fund important priorities this year, like education, healthcare and transit and pay back in order and to
the state’s pension debt. These diverse interest groups are speaking in a common
generate some muchvoice, agreeing on the need to increase taxes so as to put the state's fiscal house back in order
needed revenue.
and to generate some much-needed revenue.
In total, 107 House members voted to oppose the Governor's GRT proposal; not a single Representative voted in favor of the proposal. Seven members voted "present".
Why the GRT is Not the Answer
While a GRT can be expected to generate stable revenue, the tax also creates a number of significant problems, which
on balance outweigh the benefits. The problems with a GRT include the following:
Research shows that new firms pay a much higher effective tax rate than established firms, no matter what the industry.20
• While tax scholars typically advocate low rate, broad-based income and sales taxes, experts also acknowledge that GRTs do not treat all taxpayers equally.
GRTs are regressive taxes for both businesses and consumers.
•
GRTs are regressive for business. While proponents argue a broad-based, low rate tax imposed on the gross
income of all business taxpayers would require all businesses to pay their “fair share,” in actuality, low-profit
margin businesses and start up businesses would pay higher effective tax rates than established high-profit
margin businesses.
• GRTs are also regressive for consumers. A GRT, because it is based on a gross sales rather than profits, is a
fixed cost for business, likely be passed in whole or substantial party, to consumers, in the
Because the GRT becomes form of higher prices for products or services. This is especially the case for low profit marpart of the price of a prod- gin businesses. So, while businesses will be writing the GRT check received by the Illinois
uct or service, it affects
Department of Revenue, consumers will be actually paying most of the GRT. Because the
more of the take home pay GRT becomes part of the price of a product or service, it affects more of the take home
of low and middle income pay of low and middle income families than an affluent family, making the tax highly regressive.
families than an affluent
family, making the tax
highly regressive.
Center for Tax and Budget Accountability
13
Analysis of the Fiscal Year 2008 Illinois Budget Proposal
•
The proof of how regressive a GRT can be comes from the state of Washington, which currently has both the
largest GRT by rate and longest standing GRT in the nation. Washington also happens to be the most regressive taxing state in the country.21 The GRT proposed for Illinois would be greater than Washington's.
Given that Illinois is already the sixth most regressive taxing state,22 enacting the proposed GRT can be expected to make the Illinois tax system even more regressive, and hence unfair for low and middle income
families.
•
Further, GRTs are “pyramided” as a product moves through the economy. This pyramiding effect would also
pass additional costs on to the consumer.
What is the “Pyramiding Effect” of the GRT?
The “pyramiding effect” of the GRT refers to the compounding nature of the tax. Since the GRT is imposed on every transaction of the business cycle, a product or service is subjected to multiple levels of taxation. The chart below illustrates
this pyramiding effect, using a 1% GRT as an example.
Basic Industry sells
$100 worth of raw
materials to a
Manufacturer: $1 tax
Manufacturer adds
value and sells
$200 product to an
Integrator: $2 tax
Integrator adds
value and sells
$250 product to a
whole-seller: $2.50
Wholesaler adds
value and sells
$300 product to a
retailer: $3 tax
Retailer adds value
and sells $400
product to consumer:
$4 tax
Of course, the GRT's impact on the economy is more complex, resulting in a greater degree of pyramiding than the previous graphic indicates. That is because each business in the cycle depicted above also has inputs―and to the extent
those inputs are taxed under the Illinois GRT, the pyramiding worsens as in the following example:
Higher
Cost
Inputs
Basic Industry passes
on both the higher
cost of inputs and
GRT on raw materials
to manufacturer
Higher
Cost
Inputs
•
Higher
Cost
inputs
Manufacturer passes
on both the higher
cost of inputs and
GRT on manufactured materials to
integrator
GRT = higher
cost of both
business inputs
and final goods
at all stages
Higher
Cost
inputs
Research finds that tax pyramiding leads to tax evasion, since businesses use strategies to avoid the tax, such as conducting a portion of the manufacturing operation in another state or creating subsidiaries
While it is legally the
to receive part of their income in another state.23
business’ responsibility to
pay the GRT, in most
• If a GRT were imposed in Illinois, winners would include those businesses that sell highprofit margin products or services. Losers would include businesses that sell low-profit mar- cases the economic burgin products particularly those companies with high gross receipts compared to profit
den of GRTs are passed
margin.
on to consumers in the
form of higher prices.
Transparency: Consumers Will Bear Some of the Burden
Which Businesses Win or Lose with a GRT?
•
•
•
14
A basic principle of good tax design is that taxes should be transparent to taxpayers.
GRTs are commonly criticized for being non-transparent taxes.
While it is legally the business’ responsibility to pay the GRT, in most cases the economic burden of GRTs are passed
on to consumers in the form of higher prices.
Unlike the retail sales tax, GRTs cannot be printed on sales receipts given to consumers because it is not possible to
know the final amount of the GRT that is pyramided into the final price of a good or service. Hence, consumers ultimately bear the burden of the GRT without any knowledge that they are paying it.
Center for Tax and Budget Accountability
www.ctbaonline.org
•
Another way business may pass along the GRT is through offering lower wages to employees to offset the increased
tax burden.
Other States
•
Currently, seven states impose a GRT: Delaware, Kentucky, Michigan, New Mexico, Ohio, Texas and Washington.
However, comparing the GRT proposed for Illinois to the other GRT states is an apples to oranges comparison. Unlike
Illinois, Delaware has no state sales tax, while Texas and Washington have no state income tax; Ohio, which is new to
the world of GRT, enacted a very small, 0.26% GRT rate, that both replaced all other corporate taxation in that
state, and was designed to be, at most, revenue neutral, but the hope was it would reduce overall business tax burden in Ohio.
P ENSIONS
The Current System
Illinois already has the largest unfunded pension liability in the country totaling $40.7 billion. 24 The "Funded Ratio", for
the Illinois Pension System, that is, the percentage of what is required to be funded that has actually been funded, is also
one of the worst in the nation. In 2005, Wilshire Associates found that the average national Funded Ratio for a state
pension system was 83 percent. 25 As Figure 14 shows, Illinois' Funded Ratio of only 57.2% is significantly below the national average. 26
Figure 14
Illinois State Retirement Systems Funded Ratio
Compared to the National Average
90%
80%
83.0%
Funded Ratio
70%
57.2%
60%
50%
40%
30%
20%
10%
0%
National Average
Illinois
Source: Illinois Commission on Government Forecasting and Accountability, Report on the
Financial Condition of the Illinois Public Employee Retirement Systems, August 2006.
Looking ahead, it is important to note that the state’s required yearly pension payment is scheduled to increase significantly over the next ten years, as shown in Figure 15. Skipping an aggregate of $2.3 billion in required pension contributions over the past two fiscal years further deferred the state’s pension funding problem into the future, threatening the
state’s ability to continue funding current service levels overtime.27
For more on the Illinois State Pension Systems visit
CTBA’s special pension research project—The Illinois Retirement Security Initiative:
http://www.ctbaonline.org/Pensions.htm
Center for Tax and Budget Accountability
15
Analysis of the Fiscal Year 2008 Illinois Budget Proposal
Figure 15
Required Yearly State Pension Payments
$18 Billion
$16 Billion
$14 Billion
$12 Billion
$10 Billion
$8 Billion
$6 Billion
$4 Billion
$2 Billion
Source: Illinois Commission on Government Forecasting and Accountability
20
44
20
42
20
40
20
38
20
36
20
34
20
32
20
30
20
28
20
26
20
24
20
22
20
20
20
18
20
16
20
14
20
12
20
10
20
08
20
06
$0
© 2006 Center for Tax and Budget Accountabillity
The FY 2008 Pension Proposal
Without modernizing current revenue streams, the state simply will not have the financial capacity to pay its unfunded
pension liability plus maintain current services. That said, the Pension Ramp also is not realistic, so an alternative, longterm payment program makes sense, particularly one that eliminates the ramp and the irresponsible practice of back
loading costs. Issuing pension obligation bonds could provide some relief, if: (i) the arbitrage realized by paying lower
rates to bond holders than what is currently due in interest to the pension systems is material; (ii) all bond proceeds were
used to refinance pension debt; (iii) the bond payment levels both saved the state money over the long term and were
attainable; and (iv) the state had the recurring revenue to fund the debt service.
But, to be clear, the true savings for taxpayers comes from the value of the arbitrage on interest rates. This is risky, particularly if the market crashes shortly after the pension obligation bond proceeds are invested by the pension systems.
Moreover, the state remains on the hook for the full $40.7 billion in principal owed, whether to bond holders or the pension system.
For FY 2008, the state is proposing leasing the Illinois lottery at an estimated $10 billion and selling $16 billion in pension
obligation bonds to infuse into the pension system and bring the unfunded liability down to $14.7 billion and the funded
ratio up to 83 percent.
Lease of the Illinois Lottery
Leasing the Illinois lottery would generate an estimate $10 billion to use toward
paying down the state retirement pension unfunded liability. However, if the lottery
leased, a separate revenue stream must be introduced to replace the annual revenue stream that is targeted to education from lottery proceeds. For FY 2008, education is forecasted to receive $650 million from the lottery. In addition to funding
education, the lottery currently provides revenue for other “specialty causes.” The FY
2008 transfer to these “specialty causes” like breast cancer funding, is $4 million. If
the lottery is leased, the state will have to replace that shortfall in General Revenue
Fund (GRF) or cut other programs.
16
Center for Tax and Budget Accountability
If the lottery is leased, a separate revenue stream must be
introduced to replace the anis
nual revenue stream that is
targeted to education from
lottery proceeds. For FY
2008, education is forecasted
to receive $650 million from
the lottery.
www.ctbaonline.org
The Pension Obligation Bond Option
Admittedly, the state is already overextended when it comes to debt. But issuing a pension obligation bond will not, in
reality, increase the aggregate liability of the state. Illinois owes the $40.7 billion it has borrowed from the pensions and
has the constitutional obligation to pay existing pension benefits without diminishment. Rather than increase what the state
owes, issuing a bond to cover the unpaid pension liability could actually lessen the long-term costs of paying it, while creating the discipline that will force the liability to be paid, and establishing a long-term payment schedule that is feasible.
Illinois could save money long-term by issuing pension obligation bonds to refinance existing pension debt for one simple
reason, lower interest rates. The current interest rate of 8.0% to 8.5% on the unfunded pension liability is higher than
interest rates available in the bond market. Similar to a homeowner refinancing a mortgage to take advantage of a
lower interest rate, issuing a POB for some or all of the unfunded liability would allow the state to pay it off at a lower
interest rate than the current 8.0% to 8.5% rate.
Of course, to make this option feasible, the state still must modernize its existing tax structure through both income and
sales tax enhancements to raise enough ongoing revenue to cover both continuation of public services and the new pension
bond debt service. However, in that context, appropriate refinancing of the pension debt could save billions.
How a POB Works
The state would issue a $16 billion pension obligation bond at an interest rate lower than 8.0% and then deposit the proceeds immediately into the pension fund to pay off all or some of the current unfunded liability. If structured appropriately, the state would save money because the interest rate paid on the bond debt will be less than the interest rate on
the unfunded liability. For example, the state is currently paying an 8.0% to 8.5% interest rate on the unfunded liability.
If the POBs are issued at a 6.0% interest rate, the 2.0% to 2.5% differential is the savings to the state. The bonds will
then be paid out of increased revenue generated for the General Revenue Fund from tax enhancements, over a set period, such as 30 years.
Of course, a POB reduces but does not eliminate the state’s unfunded liability. There are also bond issuance costs, such as
lenders fees, bond counsel fees and other miscellaneous fees. However, unlike current practices, once the state issues a
POB it would have the fiscal discipline imposed on it to pay the bonds, because of the legal and contractual obligations
owed to the bond holders. Further, unlike the 2003 issued POB when the state used $2.1 billion of the bond proceeds to
help eliminate the budget deficit, the state must use all of the bond proceeds to pay off unfunded pension liability and
must adopt an equal annual payment level, rather than a gradually increasing payment schedule, to gain the long-term
savings. Back loading the repayment of a POB is simply another way to avoid making the required payment, and effectively defers problem to the future. Finally, while issuing pension obligation bonds could both save money and create fiscal discipline, the option is not truly viable unless Illinois raises enough in new tax revenue to meet both its debt service
obligation and maintain essential services.
The New Pension Payment Schedule Proposal – Concern
Currently, state actuaries determine pension funding requirements based on social, demographic and historical data.
However, the FY 2008 pension proposal includes throwing out that actuarial estimate, and instead, proposes to increase
pension payments by an estimated $280 million per year. This is bad fiscal policy, as it does not base pension funding
requirements on sound actuarial data and continues the trend of back loading payments off to the future.
Figure 14 shows the FY 2008 proposed funding level and the FY 2008 actuarial funding requirement. In essence, the
state is proposing to skip $1.3 billion in payments to the pension for FY 2008.
Figure 14: FY 2008 Proposed Pension Appropriation Compared to Actuarial Requirement
Total Appropriation
GARS
JARS
SURS
TRS
SERS
Total
FY 2008 Required Payment
Difference
FY 2008
$5,220
$35,237
$256,805
$881,473
$204
$1,178,939
$2,527,000
-$1,348,061
Source: Illinois FY 2008 Proposed Budget
Center for Tax and Budget Accountability
17
Analysis of the Fiscal Year 2008 Illinois Budget Proposal
C ONCLUSION
Overall, the FY 2008 budget continues to show the state is not on sound fiscal footing. Budget stress stemming from increased health care costs and yearly required pension payments make it necessary to modernize how Illinois taxes to
raise revenue. However, instead of implementing fair and modern reforms to allow the state to provide necessary public
services, the state has proposed a gross receipts tax that will make the Illinois tax system more regressive, as the tax will
be passed onto consumers. Additionally, the state has again chosen balance the budget by deferring Medicaid payments
to providers and sweeping funds.
Implementing comprehensive fiscal reform that modernizes the Illinois tax system while keeping the state economically
competitive like that proposed in HB 750 is the only way to provide the ongoing revenue necessary to sustain these important programs. By taking the economically sound steps of expanding the state sales tax base to include services, increasing the income tax rate, providing property tax relief and implementing a refundable credit for low and middleincome families to offset any additional tax burden from the reforms, Illinois can effectively reform its tax system to comport with the modern economy, assess tax burden more fairly among taxpayers, maintain its status as a low tax state
overall, and generate the recurring revenue needed to fund essential public services―like the new education and health
care programs proposed in the FY 2008 budget proposal.
For more information about HB/SB 750 please visit
www.ctbaonline.org
18
Center for Tax and Budget Accountability
www.ctbaonline.org
E ND N OTES
1. Center for Tax and Budget Accountability analysis of historical revenue data compared to the Bureau of Labor
Statistics, Consumer Price Index.
2. See Center for Tax and Budget Accountability, Private Sector Job Trends and the Illinois Structural Deficit, January
2007.
3. Illinois Commission on Government Forecasting and Accountability, FY 2008 Revenue Forecast, March 2007.
4. State of Illinois FY 2008 Recommended Budget.
5. Ibid.
6. Inflation based on Consumer Price Index, Bureau of Labor Statistics.
7. The Center for Tax and Budget Accountability (CTBA) uses revenue estimates from the Commission on Government
Forecasting and Accountability (COGFA) because their revenue estimates over the past ten years have been more
accurate than estimates by the Governor’s Office of Management and Budget’s (GOMB) and its predecessor, the
Bureau of the Budget.
8. State of Illinois FY 2008 Recommended Budget.
9. The FY 2008 EFAB recommendation of $6,974 is based on the FY 2006 recommendation adjusted for inflation based
on the Employment Cost Index as EFAB recommends.
10. Inflation based on Bureau of Labor Statistics, Employment Cost Index.
11. State of Illinois FY 2008 Recommended Budget.
12. See The Kaiser Family Foundation and Health Research and Educational Trust, Employer Health Benefits 2005 Annual
Survey, September 2005.
13. See State of Illinois Comptroller, “Medicaid Continues to Challenge State Budgets,” Fiscal Focus, May 2005 (Medicaid
liability growth); See Illinois Commission on Forecasting and Accountability for revenue data.
14. Illinois State Comptroller, March 21, 2007.
15. Ibid.
16. Ibid.
17. See Center for Tax and Budget Accountability, Revenue Performance is the Primary Cause of Illinois Chronic Budget
Deficits available at www.ctbaonline.org
18. Illinois Commission on Government Forecasting and Accountability Bonded Indebtedness Reports.
19. Illinois Commission on Government Forecasting and Accountability, FY 2008 Revenue Forecast, March 2007.
20. Washington State Tax Structure Study Committee Report, Vol. I and II, 2002-2003.
21. Institute on Taxation and Economic Policy, Who Pays?, 2003.
22. Ibid.
23. Ibid.
24. Unfunded liability based on the Commission on Government Forecasting and Accountability. Illinois national rank is
based on the 2004 Wilshire Report on State Retirement Systems: Funding Levels and Asset Allocation.
25. 2005 Wilshire Report on State Retirement Systems: Funding Levels and Asset Allocation.
26. Commission on Government Forecasting and Accountability, Report on the 90% Funding Target of Public Act 880593.
27. Ibid.
Center for Tax and Budget Accountability
19